When your company cannot pay its VAT, you have four basic options, ranging from arranging to pay HMRC in instalments to a formal insolvency process.
If your VAT problems are simply due to short-term cash flow problems, a payment plan is an ideal solution. If they indicate a more serious underlying problem with the business, an insolvency solution might be more appropriate.
Option 1 – Arrange to Pay HMRC in Instalments
If you don’t already have an arrangement in place, HMRC is open to instalment plans allowing you to pay what you owe over a period of time. A Time to Pay Arrangement (TTP)is typically allowed for 12 months; however, HMRC will consider longer payment arrangements in some instances[1]Trusted Source – GOV.UK – If you cannot pay your tax bill on time.
You can do this online as I’ll cover in the section below.
HMRC offers an online VAT payment plan for businesses struggling with short-term cash flow issues. You’re eligible if you owe £100,000 or less, can pay within 12 months, have debt from an accounting period starting in 2023 or later, have no other HMRC debts or payment plans, and have filed all tax returns.
This option isn’t available for businesses in the Cash Accounting Scheme, Annual Accounting Scheme, or those making payments on account.
If you can’t set up the plan online you’ll need to contact HMRC.
Option 3 – Getting a Loan or Overdraft From Your Bank
Emergency financing may satisfy your cash flow requirements, provided your limited company can handle the repayments. Your bank may offer you a loan or overdraft, or perhaps you can raise capital by negotiating with suppliers for extended payment terms or selling assets to raise cash.
Option 4 – Company Rescue Options
One possible solution to VAT arrears is a company voluntary arrangement. This is a business rescue mechanism in which an insolvency practitioner proposes a structured repayment plan with creditors to repay a percentage of the debt over time, with the remainder written off at the end of the process.
HMRC are open to these, but the CVA proposal must be voted into existence by 75% of creditors.
For larger companies, going into administration is another option that protects limited companies from creditor pressure or legal action during a period of restructuring.
Option 5 – Close Your Company
For directors who feel VAT debts are insurmountable, closing the company via voluntary liquidation is one option to consider.
Voluntary liquidation is a structured process of closing a company with debts. It is done with the help of a licensed insolvency practitioner to ensure fair play for creditors.
What Will Happen if I Can’t Pay VAT on Time: Consequences and Penalties
You’ll Receive a VAT Notice of Assessment
A VAT Notice of Assessment (NOA)[2]Trusted Source – ICAEW – VAT Notice of Assessment is the first letter you’ll receive if you’re in arrears. An NOA is a formal document indicating HMRC believes there has been an underpayment, incorrect VAT declaration or a missed payment entirely.
The notice will specify the amount of VAT HMRC calculates as due, along with any penalties and interest accrued due.
Upon receiving an NOA, your business has several options:
accept the assessment and pay by the due date
appeal within 30 days (providing evidence if you feel there’s been an error)
get in touch with them to explain you can’t pay and discuss options
HMRC will Charge Payment Penalties for Late VAT
HMRC now runs a penalty points system: you’ll be charged one penalty point for each VAT return you submit late and £200 once you reach this threshold.
This threshold is 4 points for businesses that submit VAT returns quarterly.
Once you’ve reached that threshold, you’ll be charged an additional £200 for each late payment.
For additional details, you can read HMRC’s guidelines here.
In addition to the late payment penalty, HMRC will also charge interest on the outstanding VAT amount from the date the payment was due until the date it is paid in full.
Currently, this is set at the Bank of England base rate plus 2.5%.[3]Trusted Source – GOV.UK – HMRC Interest Rates
HMRC May Opt for Distraint / Bailiffs
If HMRC feels they are being ignored or a situation has been unresolved for too long, they may instruct third-party bailiffs and their own enforcement officers to recover goods that can later be sold to pay off the debt.
HMRC will first issue a Notice of Enforcement, which alerts you to the outstanding debt and provides at least seven days’ notice before any action to seize assets is taken.
If the debt remains unpaid after the notice period, enforcement agents have the authority to seize company assets equivalent to the value of the outstanding VAT debt, plus any associated costs.
If you continuously fail to pay your VAT liabilities, HMRC may take legal action against you or your business. This could include issuing a County Court Judgment (CCJ) or even initiating bankruptcy or liquidation proceedings in severe cases.
If VAT issues become out of control, it’s essential to seek expert help and advice. Please contact one of our team members for a friendly, no-obligation consultation.
What if my Company has Multiple Debts in Addition to VAT?
If your company is grappling with multiple debts in addition to VAT, it’s a strong indicator of insolvency. As a director, this means you’ll need to tread cautiously and clearly understand your responsibilities to prioritise creditor interests as soon as you suspect the company owes more than it can pay.
Specialists like ourselves at Company Debt can provide critical insights and guidance. An informal conversation with one of our experts will help outline the options available to you without obligation.
Should I be Worried About Personal Liability for VAT Arrears?
Yes, under certain circumstances, directors can be held personally liable for VAT arrears and related issues.
It’s important to note that a company director is responsible for the submission of accurate VAT returns, even if an accountant has been enlisted to prepare and submit the return. As the director, you are ultimately responsible for ensuring its accuracy and timely filing with HMRC. Any errors made by an accountant regarding your company’s VAT will unfortunately not be considered an adequate excuse by HMRC.
In addition to return accuracy, personal liability can arise in insolvency situations. These typically trigger a detailed investigation of the actions taken by the directors leading up to the financial collapse and the creation of a directors’ conduct report.
During this investigation, the insolvency practitioners will assess whether directors continued to accrue VAT liabilities knowing that the company would not be able to meet these debts. If it is found that the directors failed to fulfil their fiduciary duties or engaged in wrongful or fraudulent trading by incurring debts when they knew the company was unable to pay, directors can be asked to pay either some or all of the losses to creditors personally.
Where to Get Help if You Can’t Pay HMRC?
If you’re struggling to pay your tax liabilities to HMRC, it’s crucial to seek professional help as soon as possible. Ignoring the problem or failing to take action can lead to severe consequences, including penalties, interest charges, and potential legal proceedings.
At Company Debt, we understand the stress and uncertainty that comes with financial difficulties. That’s why we offer friendly, confidential advice to help you navigate this challenging situation. Our experienced insolvency practitioners are here to guide you through the available options and find the best solution for your unique circumstances.
Don’t hesitate to reach out to us immediately during working hours via our live chat. Alternatively, you can call 0800 074 6757 to speak directly with an insolvency practitioner who will listen to your concerns and explore the most appropriate course of action.
We’ve helped 1000’s of company directors through stressful circumstances.
FAQs About Not Paying VAT
Can I negotiate with HMRC to reduce my VAT bill?
It’s unlikely that HMRC will reduce your VAT bill, but they may be able to offer you a payment plan to help you manage your cash flow.
What should I do if I can’t afford to pay my VAT bill at all?
If you cannot pay your VAT bill at all, you should seek professional advice from an accountant or a debt specialist such as Company Debt. We can help you understand your options.
What Are the Consequences of Not Paying VAT for a Prolonged Period?
Failing to pay VAT over a prolonged period can have serious consequences. This may include a VAT surcharge, civil action to recover the debt, and potential insolvency proceedings in severe cases.
Can HMRC Take Action Against My Assets for Unpaid VAT?
HMRC can take action against your assets for unpaid VAT, which may involve seizing assets or property to cover the owed amount. In extreme situations, HMRC could also pursue civil court action, leading to additional financial and legal implications.
What Happens If My Company Goes into Liquidation Owing VAT?
If your company goes into liquidation while owing VAT, the outstanding VAT becomes part of the company’s total debt to be addressed in the liquidation process. Creditors, including HMRC, will be paid out of the company’s remaining assets, if available, following the legal hierarchy of debt repayment.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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